Research

Energy Institute at Haas

Research

EI @ Haas Working Paper WP-252R Abstract

Severin Borenstein and James Bushnell, "The U.S. Electricity Industry after 20 Years of Restructuring" (Revised May 2015) (Revised version in the Annual Review of Economics, 2015, 7) Full Paper

Abstract:

Prior to the 1990s, most electricity customers in the U.S. were
served by regulated, vertically-integrated, monopoly utilities that
handled electricity generation, transmission, local distribution and
billing/collections. Regulators set retail electricity prices to allow
the utility to recover its prudently incurred costs, a process known
as cost-of-service regulation. During the 1990s, this model was disrupted in many states by "electricity restructuring," a term used
to describe legal changes that allowed both non-utility generators to
sell electricity to utilities - displacing the utility generation function and/or "retail service providers" to buy electricity from generators and sell to end-use customers - displacing the utility procurement and billing functions. We review the original economic
arguments for electricity restructuring, the potential winners and
losers from these changes, and what has actually happened in the
subsequent years. We argue that the greatest political motivation
for restructuring was rent shifting, not efficiency improvements,
and that this explanation is supported by observed waxing and waning of political enthusiasm for electricity reform. While electricity
restructuring has brought significant efficiency improvements in
generation, it has generally been viewed as a disappointment because the price-reduction promises made by some advocates were
based on politically-unsustainable rent transfers. In reality, the
electricity rate changes since restructuring have been driven more
by exogenous factors - such as generation technology advances and
natural gas price
fluctuations - than by the effects of restructuring.
We argue that a similar dynamic underpins the current political
momentum behind distributed generation (primarily rooftop solar
PV) which remains costly from a societal viewpoint, but privately
economic due to the rent transfers it enables.